Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Japan quakes, Canada wildfire to take nat cats over budget in Q2: JPM


Losses due to natural catastrophes in the second-quarter of 2016 are expected to exceed the catastrophe budgets of major reinsurance firms, as the Kyushu, Japan earthquakes and Fort McMurray, Canada wildfire erode Q2 profits.

Analysts at J.P. Morgan Cazenove suggest that the Japanese earthquakes in Kyushu could cause a $3 billion insurance industry loss, while the Fort McMurray, Canada wildfires could result in an insured loss as high as $4.8 billion, according to their estimates.

It’s the first quarter in a long time that insurance industry losses from natural catastrophes have been forecast to go above the budgeted loss totals of the major reinsurance firms. However the analysts note that this is unlikely to be sufficient to trigger any upwards movement in pricing as it will only erode some of the capital buffer built up over recent years.

“Our conclusion is that Munich, SwissRe and SCOR may have a potential impact equivalent to 8-11% of 2Q16e net profit,” the analysts explain.

They note that these impacts are relatively modest, but that they could be significant in terms of eroding some of the capital buffer available to cover any U.S. hurricane losses in the third-quarter of the year.

The J.P. Morgan Cazenove analysts high insured loss estimate for the Fort McMurray wildfires, at $4.8 billion, is they say due to the fact the fire has continued to burn since early loss estimates came out and they are adding 10% for reserving conservatism.

It should be noted though that the latest reports suggest that 20% of structures have been destroyed in Fort McMurray, so this loss estimate could be a little high.

In terms of the natural catastrophe budgets that the major reinsurers set, the analysts expect Swiss Re and Munich Re to overrun their quarterly nat cat budgets by 8% and SCOR by 11%. Hannover Re budgets on an annual basis, so the analysts suggest that the reinsurer will likely remain within budget for the year, due to the more benign Q1 catastrophe experience.

With the chance of higher losses due to hurricanes in the third-quarter this year, as forecasts suggest greater possibility of U.S. landfalls and the impending La Nina which could exacerbate hurricane conditions, the erosion of this quarters catastrophe budgets could mean less excess capital available to pay for hurricane claims.

However, given the benign loss experience of recent years it seems unlikely that these major global reinsurers will suffer unless we see a significant hurricane landfall this year, as their buffers are still likely to be strong.

The analysts suggest that Swiss Re could face as much as a $468m loss from the quakes and wildfire, Munich Re $410m, Hannover $205m and SCOR $103m.

They also note that retrocession is likely to come into play, with some of these reinsurers making significant use of retro capacity and the capital markets to protect their balance-sheets. That raises the prospects of some losses falling to ILS funds and ILS investors.

There is also a chance that some of these reinsurers which have quota share sidecar vehicles, could pass on some level of losses to the investors in those structures, raising the potential of more losses, albeit likely minor overall after the retention levels are considered, seeping through into the ILS market.

Also read:

Fort McMurray wildfire a “reinsurance event”, maybe ILS: Deutsche Bank.

Fort McMurray wildfire could cost insurers up to C$9bn: BMO Capital Markets.

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